The monetary policy of the world

The world’s economy this year is, as a matter of fact, going through a period in which certain conditions are becoming even more arduous. Naturally, the dynamics for each and every country are quite different, but it is not easy for anyone to dissociate from main factors that affect the global picture. In this regard, issues, which I discuss in this column every now and then, such as trade wars, oil prices and turbulences in the Eurozone also create global effects that have also agitated the market recently. And among all these factors, the mechanism of monetary policy of central banks in developed countries undoubtedly prominent. The capital outflows seen throughout all emerging economies in general are also part of this story ...

In this context, while the FOMC (Federal Open Market Committee) meeting of the U.S. Central Bank (FED) was keenly waited for, expectations were met after the announcement on Wednesday. In other words, it was not surprising that the interest rate was increased by 25 basis points, announced in parallel with stabile positive economical indicators. The ambiguous and exciting point before the meeting was rather about what kind of indications would be given for the future. This would be shaped by the FOMC members' expectation of the near future of the economy. Frankly, the current and potential effects of the fiscal stimulus policies, especially implemented by the Trump administration, is required to see the situation clearly at this point

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In this framework and upon examining the projections announced along with the decision, we notice that the FED speaks of a stronger economic table for 2018 than the one in March's meeting. The median expectation for unemployment was decreased from 3.8 percent to 3.6 percent, while the real growth and PCE inflation forecasts were increased from 2.7 percent to 2.8 percent and from 1.9 percent to 2,1 percent, respectively. The table of interest rate trends shaped by such thoughts points out that FED will raise interest rates a total of four times this year. In other words, the general expectation of the FOMC members is prognosticated to be a rate of 2.25 to 2.50 percent at the end of 2018.

Certainly, it is necessary to understand the situation promulgated to the world after the FOMC meeting and also how the statement in question is supported. In this context, we face an open ended statement where rhetoric of monetary dove is omitted to some extent. The revision, questioned "whether or not to be a bit more of monetary hawkish indication by FED" upon reading for the first time, is being interpreted by President Powell that there is no policy change. However, in my opinion it is very likely that the robust course of the U.S. economy, as suggested by the figures and also economic projections of FOMC, has led to the change of expression in question.

All these details imply that the current approach of FED toward the monetary policy will be decisive and the ever-growing number of meetings followed by press conferences will lead to a closer and more fervent monitoring of developments within the U.S. Central Bank.

On the other hand, financial cycles also certainly monitor reactions of the European Central Bank (ECB) besides the FED market, albeit of secondary importance in terms of relevant metrics. The ECB held a meeting in Riga yesterday, following the meeting of FED, and declared to the public once more that it holds its position to maintain the current stance by not changing interest rates, while announcing the latest monetary policy decisions to the world. Aware of being far from the sustainable inflation target of 2 percent, the ECB has revised its relevant forecast for 2018 from 1.4 percent to 1.7 percent and revised economic growth, decreasing it to 2.1 percent. Accordingly, the ECB announced that current low interest rates will not change until the summer of 2019 and that asset purchases will come to an end by the end of December. Accordingly, analyzing the situation after September, we are talking about a reducement in purchases of assets from 30 billion to 15 billion euros. And now, after the ECB meeting, eyes are turned to the Bank of Japan. At the end of the day, FED President Powell, in contrast to his former remarks, is worried that the situation is being exaggerated, but monetary policy actions taken by developed countries, particularly by the U.S., have undeniable effects on developing countries.

I’d like to take this opportunity, in a time when we are captivated by the winds of the World Central Bank and are following developments closely, to wish you a blessed Eid, with the hope of many more peaceful and joy-filled Eids to come.

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